Euro Tests Two-week Low

The Euro (EUR/USD) and US stocks opened at lows and spent the morning in a slow trickle upward before encountering resistance.

By Vikram RangalaTuesday, February 10, 2015 - 00:00

Euro Tests Two-week Low

Greece’s austerity showdown with its EU creditors will weigh on the markets this week ahead of the February 11 emergency meeting in Brussels between Finance Minister Yanis Varoufakis and his 18 counterparts. As new headlines appear, the markets may show volatility within their ranges before deciding on a larger trend direction.

Some basic technical analysis shows the euro in a narrowing range. Most likely it will break down further after the Brussels meeting, but the recent volatility suggests anything could happen.

The stock market news today includes not just the euro but also crude oil, which continues to rebound from last week’s low of $43.58 per barrel. While US stocks, buoyed by continued good news in the US economy, have shown independence from other markets, traders on Monday morning were hesitant to do much buying.

Greece’s new government: populism or policy
Over the weekend, Prime Minister Alexis Tsipras struck an assertive populist tone in his inaugural address to the nation. The speech confirmed his desire for debt restructuring, rather than continued punishment for failure to attain the EU’s austerity targets. It also included calls to increase the minimum wage, halt privatization of infrastructure projects, and restoring the minimum threshold for imposing taxes—all issues on which Syriza campaigned and won.

They are also issues which investors are not yet sure about, as was clear when the Athens stock index fell five percent this morning. Many probably agree that the bailout failed. Greece’s 25% unemployment is enough to prove that. But until investors can feel that the debt is not the main problem, they’ll remain fixated on that measurement. If Greece rejects austerity and demands debt forgiveness instead, investors will need some guarantee that a debt-free, populist government won’t just dip into the same well of easy money again to fund quick fixes to stay in power.

Syriza has yet to present its programs as an effective alternative to austerity. Some economists, notably Paul Krugman, have pointed out that Greece already runs a primary surplus, just not at the 4.5% level demanded by the EU. Krugman also calls the valuation of what Greece really owes “an accounting fiction,” made up by EU central bankers and undoubtedly negotiable. Renegotiate it, allow Greece to keep running a surplus but spend part of it rebuilding and re-employing, and it could prove to be, if not the best investment the EU ever made, at least not the liability it is now.

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